6 things Australian traders will be talking about this morning

ASSEN, NETHERLANDS – APRIL 26: Ivan Clementi of Italy on the BMW S1000 RR for HTM Racing picks his bike off the track after a fall during the World Superbikes Practice Session at TT Circuit Assen on April 26, 2013 in Assen, Netherlands. (Photo by Dean Mouhtaropoulos/Getty Images)

If it’s the former, the ASX should roar, the Aussie dollar should recover from this morning’s early weakness and head back toward 76 cents and bonds will sell off. If China is the focus, it could be another disappointing day for the bulls, especially on the ASX which is primed to leap higher after SPI futures rallied 42 points, 0.8% in trade Friday night.

That rally came after a solid day’s trade Friday and very strong rallies in Europe and the US. The DAX in Germany was up 3.5%, the FTSE in London rose 1.7% while the S&P 500 roared 33 points higher, decisively taking out the 2000 level and its 200-day moving average.

That positivity followed another strong rally in commodity markets with Nymex crude leaping to close at $38.50 a barrel. Copper is at $2.24 a pound and overall the move higher in the CRB commodity index reflected that commodities rallied across the board. That also meant only gold and the VIX fell.

Here’s the scoreboard (7.07am):

Dow: 17,213, +218 (+1.28%)

S&P 500: 2,022, +33 (+1.64%%)

SPI200 Futures (March): 5,222, +42 (+0.8%)

AUDUSD: 0.7538, -0.0025 (-0.33%)

The top stories:

1. Finland lost its AAA rating – no wonder the Australian dollar is so strong. Credit rating agency Fitch cut Finland’s AAA rating by one notch on Friday to Aa+. “Although some demand components saw a modest recovery in 2015, investment continued to contract in annual terms, highlighting still weak prospects for key sectors,” Fitch said. The move brings Fitch’s rating in line with S&P although Moody’s still has the nation as AAA.

Finland’s rating may seem remote in the context of the rise of the Australian dollar toward 76 cents on Friday night. But it provides an important context given Australia retains its AAA rating, has relatively strong growth, has relatively high 2- and 10-year bond rates, is benefiting from the recovery in commodity prices, and benefiting from the recovery in investor risk appetite.

At 0.7537, the Aussie is off a little from Friday’s close this morning as traders react to the Chinese data over the weekend. But overall it’s clear sentiment, and buying, has shifted sharply in the last three weeks.

2. The ASX should shoot through resistance today and it could rally hard. The Australian stock market struggled to get through the 5150/5200 resistance zone last week but after a solid night on Wall Street Friday, the indicators are that the local market is set for a strong run higher today. That assumes, of course, that worries over China data don’t derail sentiment today. They might, but the solid lead from Wall Street, where the S&P 500 has moved back into bull market territory above its 200-day moving average, should support the local market.

The question is how far and how fast the market can run before the focus turns to the Fed meeting this week.

3. BUT – the biggest force powering the stock market is starting to disappear. Since the beginning of the post-crisis bull market run, the biggest buyer of equities hasn’t been retail investors or institutions, but companies themselves, Bob Bryan reports. As the economy and earnings slows, as rates rise driving the cost of corporate borrowing to buy back higher, and as the inevitable appetite to eat their own cooking falls, companies are slowing their rate of buying. That could be a problem because “on a cumulative basis there has not been a dollar added to the US stock market since the end of the financial crisis by retail investors and pension funds,” Liz Ann Sonders, chief investment strategist at Charles Schwab, told BI US.

Bob Bryan’s piece canvasses the risk to the market if this source of buying dries up. But the good news is that if they can’t do buy-backs, they might actually invest in their business rather than take the easy route of investing in themselves. Heaven forbid!

4. There’s growing evidence that all negative rates do is prove governments need to do more on the fiscal front. The ECB pushed rates further into negative rate territory last week. It increased its QE program by EUR20 billion a month to EUR80 billion but the signs are growing that the ECB, and other banks such as the BoJ which have set rates below zero, have lost their way and are having no net positive benefit to the economy.

5. The ECB action gives the Fed room to surprise markets. One thing the ECB’s actions last week, particularly the increased value of the QE program, does is make room for the Fed to chart its own course at this week’s FOMC meeting.

Let me explain. The ECB’s actions have guaranteed the globe will continue to be awash with liquidity and that, along with the continued rally in risk assets, means the Fed has room to be as hawkish as it feels necessary – and the strength of the US labour market demands – this week. So while the meeting is not expected to be live, in the sense that the FOMC is unlikely to move rates, it is a very live meeting in other ways. That’s because the Fed will release new forecasts, a fresh dot plot chart mapping the expectations of the Fed governors about rate rises this year, and a press conference with Fed chair Janet Yellen.

6. And it’s a big week ahead for markets and traders – here’s my diary of the key events. Plenty of central bank meetings this week with only Norway’s Norges bank expected to move rates. But it’s the Fed which is the big one on St Patrick’s Day. Here at home we get the RBA minutes – what will they say about the Aussie dollar? – a speech from the RBA’s Guy Debelle and the serially unreliable Australian employment data. You can find my wrap of the outlook here.

Stocks exposed to the risk of a stronger Aussie Dollar, might not share the full joy of what looks like being a positive session for the wider market today. On Friday night, the Aussie Dollar chart pushed up to test resistance at the March/April supports from last year. If it keeps pushing up, investors are likely to start thinking in terms of this Aussie rally being more than just a bit of a short term correction.

A stronger for longer Aussie scenario would be a negative for stocks like pallet maker, Brambles. It has large US operations and reports in $US as well. Brambles’ chart is also at a bit of a watershed, approaching the support of a double top pattern.

If the support breaks, a deeper correction might follow. Possibilities for that scenario might include the 38.2% Fibonacci retracements around $11.80 or deeper retracements that coincide with the price gap that followed Brambles’s profit announcement. These are around $11.45/.55 and $11.25.

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